Money Management Strategy: Financial Statements And Budgeting Chapter 03 Money Management Strategy: Financial Statements And Budgeting

Chapter 3 Learning Objectives LO3-1 Recognize relationships among financial documents and money management activities. LO3-2 Develop a personal balance sheet and cash flow statement. LO3-3 Create and implement a budget. LO3-4 Relate money management and savings activities to achieving financial goals. 3-2

Successful Money Management LO3-1: Recognize relationships among financial documents and money management activities. Daily spending and saving decisions are the main element of financial planning Decisions must be coordinated with needs, goals, and personal situations MONEY MANAGEMENT is the day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security 3-3

Opportunity Cost and Money Management Spending for current living expenses reduces the amount you can save and invest Saving and investing for the future reduces the amount you can spend now Buying on credit ties up future income Using savings for purchases results in lost interest earnings and depletes savings Comparison shopping can save money but takes valuable time 3-4

Components of Money Management 3-5

A Personal Financial Records System An Organized System of Financial Records provides a basis for: Handling daily business affairs, such as paying bills Planning and measuring financial progress Completing required tax reports Making effective investment decisions Determining available resources for current and future spending Home file, safe deposit box, computer, cloud storage 3-6

Home Files, Home Computer or Online Items in Your Home File Personal and employment records Money management records Tax records Financial services records Credit records Consumer purchase and automobile records Housing records Insurance records Investment records Estate planning and retirement records 3-7

Safe Deposit Box or Fireproof Home Safe Items in the safe deposit box Records that would be difficult to replace Birth, marriage and death certificates Citizenship and military papers Adoption and custody papers Serial numbers and photos of valuables CDs and credit and banking account numbers Mortgage papers and titles List of insurance policies Annual stock investment statements Rare coins and stamps Copy of will 3-8

Personal Computer, Tablet, Phone Records on your personal computer Scanned copies of documents Spreadsheet summaries of budgets and investment records Digital versions of income tax returns, wills, and estate plan Apps for banking activities, financial record keeping, and investment transactions 3-9

How Long Should Records Be Kept Keep birth certificates, wills, and Social Security data permanently Keep records on property and investments as long as you own them Keep documents related to the purchase and sale of real estate indefinitely Keep copies of tax returns and supporting data for seven years 3-10

Personal Financial Statements LO3-2: Develop a personal balance sheet and cash flow statement. MAIN PURPOSES OF PERSONAL FINANCIAL STATEMENTS Report your current financial position in relation to the value of the items you own and the amounts you owe Measure your progress toward financial goals Maintain information on your financial activities Provide data you can use when preparing tax forms or applying for credit 3-11

Personal Balance Sheet: Step 1 PERSONAL BALANCE SHEET: WHERE ARE YOU NOW? also called the Net Worth Statement or Statement of Financial Position Preparation requires using three steps STEP 1: LIST ITEMS OF VALUE Assets — what you own Liquid assets Real estate Personal possessions Investment assets 3-12

Personal Balance Sheet: Step 2 and 3 STEP 2: DETERMINE AMOUNTS OWED Liabilities — what you owe Current liabilities (less than 1 year) Long-term liabilities STEP 3: COMPUTE NET WORTH Net Worth = Assets - Liabilities Assets = Liabilities + Net Worth Insolvency is the inability to pay debts when they are due 3-13

Net Worth Net Worth is an indication of your current financial position on a given date Ways to increase Net Worth Increasing your savings Reducing spending Increasing the value of investments and other possessions Reducing the amounts you owe 3-14

Net Worth Calculation Example If a household has $193,000 of assets and liabilities of $88,000, then the net worth would be $105,000. Assets - Liabilities = Net Worth $193,000 - $88,000 = $105,000

The Cash Flow Statement WHERE DID YOUR MONEY GO? Cash Flow is the actual inflow and outflow of cash for a given time period Also called a Personal Income and Expenditure Statement Process for preparing a cash flow statement: 3-16

The Cash Flow Statement: Step 1 Preparation requires using three steps STEP 1: RECORD INCOME Wages, salaries, and commissions Self-employment business income Savings and investment income Gifts, grants, and scholarships Government payments, such as Social Security, public assistance, and unemployment benefits Amounts received from pension and retirement programs Alimony and child support payments 3-17

The Cash Flow Statement: Step 2 and 3 STEP 2: RECORD CASH OUTFLOWS Fixed expenses Variable expenses STEP 3: DETERMINE NET CASH FLOW The difference between income and outflows can either be positive (surplus) or negative (deficit) Cash flow statement provides the foundation for preparing and implementing a spending, saving, and investment plan 3-18

Budgeting for Skilled Money Management LO3-3: Create and implement a budget. A budget is a spending plan The main purposes of a budget are to help you: Live within your income Spend your money wisely Reach your financial goals Prepare for financial emergencies Develop wise financial management habits 3-19

Creating and Implementing a Budget 3-20

The Budgeting Process Step 1: Set Financial Goals Step 2: Estimate Income Step 3: Budget An Emergency Fund and Savings Step 4: Budget Fixed Expenses Step 5: Budget Variable Expenses Step 6: Record Spending Amounts Step 7: Review Spending and Saving Patterns Review Your Financial Progress Revise Your Goals and Budget Allocations

Characteristics of Successful Budgeting A budget will work only if you follow it Experts advise that a successful budget should be: Well planned Realistic Flexible Clearly communicated 3-22

Types of Budgeting Systems Which one works for you? Mental budget: exists only in your head Physical budget: use envelopes for your expenses such as food, rent, etc. Written budget: detailed plan for spending in a spreadsheet or notebook Computerized budgeting system: use Excel or software such as Quicken Online budget: use bank or financial institution website Budgeting app: use cell phone or tablet 3-23

Money Management and Achieving Financial Goals LO3-4: Relate money management and savings activities to achieving financial goals. IDENTIFYING SAVING GOALS To create an emergency fund for irregular and unexpected expenses To pay for the replacement of expensive items, such as automobiles, or a down payment on a house To buy expensive items like sports equipment or to pay for a vacation To provide for long-term expenses such as retirement or the education of children To earn income from the interest on savings for use in paying living expenses 3-24

Selecting a Saving Technique Write a check each payday as a percentage of income and deposit into savings Use an automatic payment or a smartphone app to electronically transfer an amount into savings Use Payroll deduction to deduct from your salary and deposit into savings Save coins in a container or spend less on certain items; take a sandwich instead of buying lunch or limit impulse buying for snacks or coffee 3-25

Calculating Savings Amounts To achieve financial objectives, convert savings goals into specific amounts